Ever wonder why it costs and arm and a leg to insure an arm and a leg? Medical insurance premiums rise faster than overall inflation. It doesn't seem right, so I did some exploring and found out why.

First of all, most insurance carriers pay out 80% of their premiums in health care costs and the remaining 20% goes to administration (those running the insurance company) and commissions (those selling the policies.) As far as that 20% is concerned, well, the 2008 insurance company CEO compensation was literally staggering! I'm sure commissions on selling policies are a nice penny as well.

Now that we've taken care of that 20%, let's examine the remaining 80%. The reason this is so high starts with the services for which insurance companies are paying, and these services are going up much faster than inflation. The two main culprits are hospitals and prescription drugs; the costs of both of these services increase 20% per year. So, here's the breakdown of this 80%:

17% for prescription drugs

33% for doctors

50% for hospitals

Since half of the insurance company's costs are from hospitals, let's see why that is always increasing faster than general inflation.

First of all, there is a shortage of nurses. In Dallas, if you look at the Jobs section of the newspaper, there's always a plethera of opportunities for skilled nurses. With the old supply and demand law, that means they can push for higher wages since they (nurses) are in short supply, just like when there's not enough oreos to go around, the price of oreos goes up.

Next, some procedures require more nurses than they used to, so it makes the procedure itself more expensive. Additionally, over the years, new equipment, such as MRI's and CT scans are part of a procedure, and the cost of those machines (which isn't cheap) is now part of a procedure that wasn't there before. This is not to mention the added cost of "defensive medicine," where doctors order expensive procedures with expensive machines because they don't want to be sued for negligence for not having done the procedure.

Most importantly, hospital costs are rising because the majority of patients at a given hospital don't have insurance, so they are covered by Medicare, Medicaid, or are simply charity cases. Medicare and Medicaid payments are fixed, so they don't cover any increase in costs. So, who do you think pays the costs that Medicare and Medicaid don't cover? You guessed it!

Now you know why insurance premiums are so high.